This study examined the empirical relationship between spot and
forward prices in the PJM electricity market using hourly data. Previous
theoretical models and empirical studies on forward premia were synthesized
to thoroughly analyze five years of recent data in the PJM markets. Forward
premia were found to be statistically significant and correlated with the
variance and skewness of spot prices as well as the two interaction variables
of gas storage with measures of hot or cold temperature. Forward premia
were also found to vary systematically throughout the day in conjunction
with specific economic measures of risk: the conditional volatility of
unexpected changes in demand, spot price, and total revenue. The existence
of forward premia initially suggested inefficiencies in the PJM electricity
markets. However, the results in this study support the hypothesis that prices
are determined by rational risk-averse economic agents.